Hostaway raises US$175-million as software startup defies tech downturn

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Hostaway OY looks like many software startups: It’s hard to pin a nationality on it.

The company is sort of Canadian – Swedish-born chief executive officer Marcus Rader lives in Toronto, and about 20 of its 120 employees are in this country – but is domiciled in Finland, where two co-founders, a Finn and an Iranian, live. It had offices in Toronto and Barcelona prepandemic, but gave them up to go fully remote; it has employees on four continents.

But Hostaway, which sells software used by owners of short-term vacation rental properties to run operations, is different in other ways: It raised no venture capital during the pandemic boom (and just US$2.1-million before that), it has managed its capital efficiently and it is profitable. It has experienced 10-fold revenue growth since 2021, as travel companies rebounded while other startups slowed down.

Another distinction: while soaring interest rates and inflation put the brakes on many startups, they actually helped Hostaway, according to Mr. Rader. Higher costs “means the family cottage might become unsustainable to just keep empty and maintain, so more families have started renting them out, hiring property managers to take care of them,” he said. “Those property managers happen to be our customer, so a lot of our growth has come from that.”

Now, the startup is cashing in on its good fortune. Global private capital firm PSG Equity LLC has invested US$175-million for an undisclosed majority stake in the eight-year-old company, whose software is used by customers to manage more than 100,000 properties listed on rental sites such as Airbnb, Booking.com and VRBO.

“We are impressed with the quality of the Hostaway team, their vision and execution in building what is, in our view, a highly differentiated category leader with multiple levers of value creation,” said Edward Hughes, PSG managing director, in a statement. “We believe the company has a significant opportunity to lead this industry, as it continues to scale its integrated platform, expand globally and help its customers meet the growing demand in the short-term rental market.”

Mr. Rader, who grew up in Finland, worked for startups and lived in several European countries before he moved to Canada in 2015 with his Poland-born wife, after visiting this country and feeling “this was the best thing we’d ever seen.” He and his co-founders, who he knew as friends from past startups, decided to start their own company, focusing on the booming short-term rental space where they felt property owners lacked tools to manage their operations.

The Hostaway platform is similar to other small business management software tools geared toward specific groups, including some of Canada’s most successful startups: Shopify and Lightspeed Commerce (for merchants), Jobber (home-service providers), Clio (lawyers), Jane Software (medical practitioners) and Hi Mama (daycares). Hostaway’s software allows users to communicate with staff, service providers and customers, co-ordinate marketing efforts, automate repetitive tasks, provide analytics, and manage smart locks on properties. Its rivals include Guesty and Cloudbeds.

Hostaway’s business began to take off in late 2019. Then the pandemic hit and “it turned out we were one of the worst industries to be in,” Mr. Rader said. The company lost 60 per cent of its customers and cut 15 of its 40 employees in early 2020. But the trio realized travellers were still heading to more secluded beach, mountain and lake destinations, “especially in the southern U.S. that had less restrictions. So, we very quickly pivoted everything from how we support to our marketing to even changes in the product to cater to that market.”

Business took off again in mid-2021, and by late last year, when only top-performing and profitable startups were attracting financing, Hostaway met with a surge of investor interest and received multiple bids when it went looking for financing. The company generates close to US$20-million in annualized recurring revenue and should reach US$25-million by year-end, Mr. Rader said.

The CEO declined to share Hostaway’s valuation, how much of the business PSG bought or how much of the proceeds went to buy out early investors. But he indicated a substantial portion went to its balance sheet as the company hopes to hire much much-needed staff in most functional areas including finance, engineering and human resources as “things are breaking at the seams.” Hostaway may also look at acquisitions.

However, it will not abandon its frugal ways, Mr. Rader said – noting the three co-founders only spent US$80, including tax and tip, for their celebration dinner in Finland after the deal closed.

“That’s capital efficiency,” he said.